The European Commission
adopted regulations implementing the European Market Infrastructure Regulation
(EMIR) to ensure that information on all European derivative transactions will
be reported to trade repositories and be accessible to supervisory authorities,
including the European Securities and Markets Authority (ESMA), to give policy
makers and supervisors a clear overview of what is going on in the markets.
EMIR also requires standard derivative contracts to be cleared through central
counterparties as well as margins for uncleared trades. EMIR and the
implementing regulations and standards establish stringent organizational,
corporate governance and prudential requirements for these central
counterparties.
The regulations and standards were developed by ESMA and
adopted by the Commission without modification. EMIR entered into force on
August 16 2012. The regulations and standards implementing EMIR will enter into
force on the 20th day following publication in the EU’s Official
Journal. As with other EU regulations, their provisions will be legally binding
on all Member States from the day they enter into force without implementation
into national law.
Under the implementing
regulations, central counterparties must have
a sound framework for the comprehensive management of all material risks to
which they may be exposed. They must establish documented policies and systems
that identify, measure, monitor and manage such risks. In establishing risk-management policies,
central counterparties must structure them in a way as to ensure that clearing
members properly manage and contain the risks they pose to the central
counterparty.
Moreover, central counterparties must take an
integrated and comprehensive view of all relevant risks, including the risks they
bear from and pose to clearing members and, to the extent practicable, clients. The governance
arrangements must ensure that the board of the central counterparty assumes
final responsibility for managing the risks. The board must determine and
document an appropriate level of risk tolerance for the central counterparty
and the board and senior management must ensure that the procedures and
controls are consistent with the risk tolerance and risk bearing capacity and
that they address how the central counterparty identifies, reports, monitors
and manages risks.
A central counterparty must ensure that the risk
management function has the necessary authority,
resources, expertise and access to all relevant
information and that it is sufficiently independent from the other functions of
the entity. The chief risk officer of the central counterparty must implement
the risk management framework, including the policies and procedures
established by the board.
Under the Commission regulations, a central
counterparty must have adequate internal control mechanisms to assist the board
in monitoring and assessing the effectiveness of its risk management procedures
and systems. The internal controls must include sound administrative and accounting procedures, a robust
compliance function and an independent internal audit and validation or review
function. Ultimately, a central counterparty must prepare an annual financial
statement and have it audited by an outside independent audit firm within the
meaning of the Audit Directive (2006/43/EC).
A central counterparty must also establish a permanent
and effective compliance function which operates independently from the other functions
of the entity. There must be a chief compliance officer with a duty to
regularly monitor and assess the effectiveness of the measures put in place and the actions taken to address
any deficiencies in the central counterparty’s compliance with its obligations.
The chief compliance officer must also establish procedures for the effective
remediation of instances of noncompliance.
The remuneration policy of the central counterparty
must be designed to align the level and structure of remuneration with prudent
risk management. The policy must account for prospective risks as well as existing risks and risk
outcomes. Pay out schedules must be sensitive to the time horizon of risks. In
particular in the case of variable remuneration, the policy must take due
account of possible mismatches of performance and risk periods and ensure that
payments are deferred as appropriate. The fixed and variable components of
total remuneration must be balanced and consistent with risk alignment.